How to buy a house with friends?

October 6, 2005 6:46 PM

Friends buying a house together. Help us keep things fair, sane and civil.

Two friends and I are tired of renting. We've decided to buy a cheap house together and fix it up instead. (FWIW, "cheap" here in Pittsburgh can be very cheap indeed.) The goal is for all of us to put money and work into the house, and for all of us to get a share of the profit if we sell it. We like and trust each other, and we want to keep it that way, so we want to put all the arrangements in writing ahead of time.

But what should those arrangements be? What's the fairest and safest way to set up a project like this? In particular, I'm wondering:

• How should we set up the ownership of the house (and the mortgage if we need one)?
• How do we determine a fair way to split the profits if we sell?
• What if one of us wants to move out before we sell the house?

posted by nebulawindphone to home & garden (13 comments total)

Sorry but - lawyer, lawyer, lawyer... And not just any lawyer, but a Pa. real estate lawyer.
posted by Carbolic at 7:06 PM on October 6, 2005

Two of my friends bought a house together right out of high school. It was in a smallish state university town, a cheap house in the sort of low-rent, college student ghetto between campus and frat row (such as it was). It was divided up as a duplex, two bedrooms on each side, and they rented the back half to me and another guy, cheap. All went well until one of the owners joined the army and went away for a while. He didn't contribute much to the house payments while he was gone, and maybe less when he got back. They finally worked something out, I think he basically just turned over his half in exchange for his half of the back payments. By then we had pretty well wrecked an already shoddy house. (You know, college kids, parties, etc.) I believe the other friend still owns the house and makes payments on it, even though he has long since moved out. Last I knew he was renting it to one guy, possibly not making enough from that to pay the mortgage.

The moral: be careful. Even though now you "like and trust each other," things can change. Think about all the different things that might make your dream go sour, and plan for them ahead of time, possibly with a lawyer. Sorry I can't help on the details of mortgage/title/ownership arrangements, but that's why you need a professional. An idea from another thread previously on the green: look for a lawyer experienced with gay couples and home ownership. The dynamics there are legally different from a married (hetero) couple, but may be very similar to your setup.
posted by attercoppe at 7:11 PM on October 6, 2005

We like and trust each other, and we want to keep it that way...

Then don't buy the house. Seriously. If you're going to thumb your nose at conventional wisdom and insist, "We'll be the exception to the rule," that's fine -- but realize that road is littered with the broken friendships of people who said the same thing.

Everyone knows the adage. Everyone believes it. And yet when the time comes, everyone thinks, "Oh, but...I'm different." Pride goeth before a fall.
posted by cribcage at 7:41 PM on October 6, 2005

Perhaps you could buy ajoining row homes. Each person would own a single row home, but you could fix them together.
posted by malp at 7:56 PM on October 6, 2005

Carbolic is right, a local real estate lawyer will be worth everything he charges. Check with your local mortgage banker for recommendations.

The best way would be to put together an LLC and each of the owner buys shares of the property. That way the slacker, and there will be a slacker, just loses some percentage of the value over time because the total value is based on total contribution.

The buy out will be very straghtforward if the remaing partners can afford it or they can "mortgage" the sellers shares. The tricky part is the tax return. You will probably have to have it done for you professionally at least once, but the lawyer can show you the payouts from owning property to mutual benefit that will make it a worthwhile investment.
posted by ptm at 8:08 PM on October 6, 2005

I think your biggest problem is going to be how much equity each of you deserve in relationship to how much sweat you each put into the place. I can easily imagine that one or tw of you will work harder on the place than the other(s). If you aren't charitable about it not making a difference, you are in for some bad feelings.

I would break down the house into equal projects that each of you are responsible for. You each work on your own projects, and if you finish before someone else, great. Regardless, each has to contribute equally. If they don't, they lose "shares" of the equity.

That being said, I think this is a bad idea. It's just too easy for problems to arise and it is difficult for friendships to weather when things go bad fast. Unlike people who invest in something with just a mind for business, you are all emotionally involved as well. Good luck on whatever you decide.
posted by qwip at 8:12 PM on October 6, 2005

We like and trust each other, and we want to keep it that way...

Then don't buy the house.

I have to agree -- from personal experience.

Financial/shared real estate arrangements between friends are at the whim of so many future changes, as each individual's path in life is so different (circumstantially, emotionally, financially, spiritually, etc.) and subject to the whims of fate. I have seen arrangements like this tied-up in dispute years down the line.

In the event you go ahead -- by all means hire an attorney with whom you all feel comfortable.

As mentioned, "play out" and plan for all future contingencies. Structure the deal in such a way that you value the property commensurate with "cash-in" and "proportional ownership." That is -- will each of you be putting equal amounts of "cash down?" If you get a mortgage, will each of you be paying "equal shares" of the monthly payment; of the "insurance and taxes?" How will you account for "labor" and "building supply costs" on house improvements -- hours and/or "degree of difficulty of tasks performed?" [I have seen situations where one person has spent drastically more time, energy and effort in improving the property, only to feel "used" when -- after a falling out -- there was a subsequent sale of the property and they felt "cheated" in that they "did all the work" and "bought all the supplies."]

Be very clear as to what the rules will be if one or more of you want to "get-out-of-the-deal?"

Things to think about (and, these are just a few) --

(1) Should there be a time frame in which no one can "sell" their share?

(2) If someone seeks to sell their share, do the others maintain "right-of-first refusal" to purchase that share -- individually, or collectively?

(3) When/if someone chooses to "sell" -- and others do not exercise a "right-of-first refusal" -- what provisions are there for the others to "approve" to whom they sell their share?, etc.

It would be wise to also make clear how the property will be assessed at any future change in ownership.

You should consider a provision in which the three of you will agree that you will seek individual real estate assessments and average such to determine a value for the property at any point in the future when a change in ownership status (including -- yes it's uncomfortable -- but the death of any given partner) occurs.
posted by ericb at 8:12 PM on October 6, 2005

Just as a gauge you can use right now, ask yourself if you'd feel a bit queasy about walking through all the nightmare scenarios in detail, together. If anyone involved said "Oh, come on, we don't need this," get out immediately. If those scenarios are hard to talk about now, they'll be impossible to talk about when the shit is flying.
posted by argybarg at 8:30 PM on October 6, 2005

I have done this ... there were three of us, actually: me, my boyfriend, and a third (female) friend. We had all been roomates renting the house together and the owner suddenly offered us the chance to buy the house at a huge steal, and we took it.

We never used a lawyer. Our biggest hassle was actually getting insurance -- a string of insurance agents couldn't get their heads around the idea that three unmarried adults were buying a house they lived in. Also, we had to reject an otherwise decent motgage offer because the guy at the bank got all "nudge nudge wink wink -- hey buddy you're bying a house with two women, eh?" at my boyfriend and basically made an ass of himself.

All of our names were on the feed in some special form (tenants in common? maybe?). We had a shared checking account that we used to pay for house-related bills only. All three of us contributed an equal share to the down payment (I believe it was $4500 each), and each of us contributed an equal monthly share to the "house account" to pay the mortgage and other house related costs. We also all three lived in the house, along with two other roommates.

We're all still friends, and just over a year ago my boyfriend and I bought out the third friend so that she and her husband-to-be could buy their own house. We had verbally agreed before hand that we would not agree on a "buy out" price, but whatever the price would be had to be more than you had put in as the down payment. In the five years we owned the house it tripled in value. When Jill wanted out, we said "what do you think the buy out price should be" and she named a figure, and we negotiated to pay part of it by allowing her to live in the house "rent free" for a period of time while they were house hunting, and then we paid the balance with a home equity loan.

I understand there were risks in doing it this way, but, for us, we all remained friends and were all happy with how things turned out. I'd say that the key for us was that we were all actually living in the same space, and that we each treated the others with respect. It also helped that we had all been living in the same space together for nearly two years before the deal came our way, so we knew that we could deal with that part of it. I personally think that had any one of us "lawyered up" it would have destroyed the handshake-based trust that we had in one another.

I would not trade our experience for the world. My boyfriend and I have a great house; Jill recouped her investment many times over; and we're all still good friends. My email is in my profile if you have specific questions.
posted by anastasiav at 8:59 PM on October 6, 2005

I wish I had read this thread before I bought a house with a friend 6 years ago. There is some fantastic advice here. And now that I've been through the "good friends --> co-homeowners --> buy out your former friend --> no longer really friends" scenario, I can say that everything stated above is worth reading and re-reading.

Get a good attorney.
Write everything down.
Have an exit strategy.
Keep meticulous financial records.
Expect the unexpected.

Also, understand that people you think you know can become extremely crazy when it comes to business decisions and matters of money. And they can become particularly crazy when those money matters pertain to their HOME.

Oh, and it will be nearly impossible for three people to agree on paint colors, toilet seat styles and whether or not that deck needs replacing. Be prepared to be out voted on things.
posted by evoo at 10:01 PM on October 6, 2005

Although I think getting into financial dealings with friends is risky to the friendship, so is being in a friendship. People come and go in our lives, no matter how much we dislike that fact, and it's possible that the friendships ruined by being partners in something would have faded out or flamed out over something different anyway. So consider the risk but I would stop short of gloom and doom. I had an ill-fated business venture with a friend that crashed and burned and although I wasn't thrilled with him at the time we're still good friends.

I think what would go a long way towards easing possible problems, nebula, would be if all three of you would be able to survive under the mortgage payment on your own. This might not be possible but it sure would go a long way towards easing potential problems if someone flakes out. Or gets hit by a bus - you'll need insurance for each of you now.

You might want to thumb some books on real estate investing. Although that's not exactly your purpose I expect most will have tips on contracts and business arrangements among investers.
posted by phearlez at 6:36 AM on October 7, 2005

A very close friend and I purchased a house about a year and a half ago and so far we've had very few issues to deal with. The most annoying one is our friends/family asking when we're going to get married. That is frustrating because we are best friends and have no intention of dating one another. (We've tried that and it didn't work.) There isn't anyone else I know that I would even consider doing this with. That said, I highly suggest you take the advice of other posters and make sure you put everything in writing and seek the advice of an attorney. Honestly, we have not done these things and I regret it. Not because of any problems we've had or that I anticipate any but just because it makes sense. People DO change, jobs change, situations change, and I'll say it again: people change.

Reading the responses to this post remind me how important it is that we actually these things now even though we've already bought the house. We are in a slightly different situation since we bought a house that someone else had recently finished remodeling so there isn't much work to be done. That eliminates those problems of one partner not pulling their weight in regards to working on the house and paying for supplies, etc.
posted by J-Garr at 10:22 AM on October 7, 2005

I think it's potentially a great idea. When you find a house you want to make a bid on, start making a list of how you will fix it up, who'll do what work, how you'll pay for it. Discuss what will happen if someone gets sick, loses a job, moves. What if one of you falls in love and wants a sweetie to move in? If you can talk about the possibilities really honestly and you still want to try it, make sure it's really cheap so you don't have too much to lose.
posted by theora55 at 6:19 PM on October 7, 2005